The Economic crisis and financial crisis: trying to understand!
We watered the causes and effects of other crises, so that our leaders juggle billions of euros or dollars. Things move so quickly to the point that one forgets to explain what happens to us, its origin and especially the likely effects on economic actors that we all are.
Crisis, you said crisis?
Firstly what is a crisis?
Here we must distinguish two different things though often (but not always) related:
- The financial crisis that is sometimes called "crash" that affects the financial markets (stock market and bonds, in light trading), and / or banks and / or states (where they are distressed, for example). They are fairly numerous in recent history and unequal size. The most serious financial crisis are posing a systemic risk, that is to say, they in turn can affect their environment and lead to an economic crisis;
- The economic crisis we now fear is much more serious consequences because it can affect all economic actors, households, consumers, businesses, governments and not just investors, lenders and borrowers. The economic crisis tends to result in a decline in purchasing power, rising unemployment and bankruptcies due to a decline in economic activity (recession or depression). Fortunately, they are less likely than financial crises, but their consequences are more severe, especially on the weaker economic players.
The question to ask then is what form of economic crisis will turn the financial crisis, but first let us return to the origin of the financial crisis.
Why this financial crisis?
The financial and economic mechanisms such are often presented as complex and it is often difficult to figure it out. However, everyone is entitled to an explanation of the reach of many and that is what we'll try to do.
Let me say first that financial markets are the place where those who have money (savers, their banks did) shall make it available to those who need it (business, local, private borrowers for a house, a car or other).
All this goes well when the rules of "game" are met and that such borrowers repay regularly they owe to their lenders.
By cons, if borrowers can not repay their lenders (usually banks), the machine binds and lenders can not lend to others who can no longer purchase products from companies that sell more and therefore dismiss etc..
This is what happens to us now because a large amount of U.S. borrowers can not repay loans that had been made at least recklessly by U.S. banks. Recklessly as it seems that to alleviate the financial crisis triggered by the tragedy of the World Trade Center, the U.S. monetary authorities have opened the floodgates of credit to individuals - the initial idea was to enable the poorest to buy their home - significantly to the risk that borrowers can no longer pay. That's what happened when the cost of repayment of loans at variable rates began to explode due to higher rates ...
All that Is not controlled, you say?
If course there are rules of prudence (called prudential) imposed on banks by the Basel agreements with respect to solvency ratios (the ratio Cooke replaced by the ratio MacDonough particular), but the difficulty is the very definition of risk and customers at risk. In any case what happened shows a lack of management and supervision of banks in this area (the famous financial governance).
Finally, it is the nesting of international financial systems (eg U.S. pension funds supplied by the superannuation fund of European companies, but if the Americans repatriate their pension funds, this implies a lack of liquidity for companies involved!)
What effects can we be afraid of the transformation of the financial crisis in economic crisis?
Science knows analyze economic crisis ... a posteriori. Thus, the crisis is part of the economic landscape and theorists even speak of economic cycles long or short the following characteristics:
- The ascending phase (growth and relative economic prosperity);
- The crisis (caused by a financial crisis, an external shock, inflation, etc.).
- The descending phase (stagnant growth, recession or depression, unemployment, bankruptcy);
- The recovery (growth takes off and with it employment, wages purchasing power, etc..).
If so these phases are well known but an evil one who can give the time and especially the size.
What is known however, is that we are in a major financial crisis which will have important effects on the real economy (all economic activities except finance and the stock market) have already started in the building sector , real estate and the acting. These repercussions will no longer strongly economically weaker (low income, insecure jobs, the unemployed, etc.).
However, the effects of the economic crisis may be more or less mitigated by public policy. Indeed, they are familiar with these phenomena of crisis and are provided with tools to mitigate their effects.
How to mitigate the effects of the economic crisis?
Observers agree that reinjecting actually arguing, massive liquidity (including those billions of people kept harping on us) in the financial system it is reactivated. It remains that the structural problems of governance and control are not yet resolved.
For the economic crisis, what is called a policy mix (or mixed policy), governments have two major elements to fight against the effects of a crisis are:
- Monetary policy,
- Fiscal policy.
These two elements allow them to engage in counter-cyclical policies (Anti cons cycles) depending on circumstances.
Monetary policy is to play on interest rates is interesting to curb inflation and may accompany a recovery by low interest rates. We do not master very little setting interest rates because they are now set by the European Central Bank, guardian of tame inflation and an exchange rate adjusted. Do not complain quite the opposite because we imagine the risks of devaluation that we could have known without the euro.
Fiscal policy can help in such a context, to revive the economy. How? Either by direct investment and purchases of government and public sector either through tax cuts targeted to taxpayers or the most modest burdens on business, or by supplementing the income distribution (minimum benefits, such ).
This is where our weakness is French openly because we have no leeway for fiscal policy offensive.
So our 40 billion budget deficit could weigh heavily.
Imagine that our public finances have been balanced we could temporarily inject thirty billion of public money in the real economy. That housing would not be able to build with all or part of this money? This would have also supported the construction industry and public works often most affected by unemployment during the crisis ...
Then of course costs will be made because they are essential to reduce the effects of the crisis, but they will add to the deficit that is already grown to over 50 billion euros. Eventually, it will not sufficiently mitigated the impact of the crisis and especially we will still be a little more digging the deficit that will generate even more interest payments and especially which hinder our future ability to fight against another crisis.
The priority before the crisis should be the reduction of deficits in which the rulers of these twenty-five years are all more or less responsible! Now, we are very lacking.
This priority will return even more imperative in times less harmful.
In the meantime, hope that the real effects are more mitigated possible and that public expenditure to be incurred to address benefit the most vulnerable.
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